LOVE IT, LOVE IT, LOVE IT

The rest of the world followed the USA lead over night; markets around the world soared! The part I love the most is that at least half the talk is about the boom in oil and gold. A lot of money is pouring into the "tired end" of the market while the "jump" in the "other end" is just getting under way. Part of the reason is that many investors falsely believe that inflation is about to soar.

Yesterday a reader sent an article that suggested investors should hide out in bonds until the "worst" is over. My SELL, SELL, SELL on bonds is looking pretty good right now; bonds have fallen while stocks have soared. Economics professor, James Hamilton, issued a follow up study yesterday that suggests that the whole curve shifts down when the Fed Funds Rate is cut. Oops! Not this time! My belief is that even the good professor tends to get the cart before the horse. In the past, central bankers waited too long to cut short rates; the economy has often reached "free fall" before the start of the rate cuts. The first move in rates is never enough to float a falling lead hot air balloon, it is only enough to slow the fall. After the second cut or two, it is only common sense for long rates to go up, stimulating an economy is positive for future real growth and for future inflation.


The great news is that inflation continues to be very well behaved. The massive purchases of raw materials in Asia continues to be converted into lower priced goods around the world. The dramatic fall in the US dollar continues to "put the wood" to the seat of the pants of all the other industrialized nations. Exports from the USA and from China (which pegs its currency to the US Dollar) are soaring. You won't read this hardly any where else but, Bush has made some great chess moves in recent months. He has sacrificed a pawn or two in order to set up the democrats. If you were a democrat senator right now, what bill would you propose and expect to get signed into law?

The big push by democrats to "bring the troops home now" has failed in its purpose while pushing the democratic presidential candidates to take left wing positions that will not help them in the general election. The American people want to be safe from terror. Bringing the troops home in the middle of the war is not the winning position. The latest attempt to disrupt the war, forcing the troops to spend a lot of "down time" is unraveling.

On the energy front, the "big oil" man, Bush, has forced the environmentalist to admit that ethanol is not the answer. Bush caved into the democratic game of "paying off corn farmers." By doing so, he helped start the back lash to wasteful subsidies for bio-fuels. Many folk on both sides of the isle have started to understand that it would consume far too many food resources to replace even a small portion of our energy needs. Even the carbon sequestering schemes are starting to be seen as just more government boondoggle. The fact of the matter is that the most effective scheme for sequestering carbon is managed forest growth. New growth sequesters carbon much faster than old growth. China is now moving hard in the direction the USA headed over 100 years ago. The USA has reforested millions of hectares. The fear of environmental activist, those who want to leave the forest alone even if it means the occasional fire burns a few billion acres, has impeded the process but common sense prevails over the long haul.

The wealthy are always attacked by the left but, of course, wealth allows the "right thing" to be done. The poorest of the poor continue to use up the forest. Countries like Bangladesh are down to 7% forest coverage. A country like China, which moved rapidly from the poorest of the poor to a developing nation, can now afford to join the USA in its reforestation program. Of course, much more could have been done in the USA. The USA continues to pay farmers not to grow crops on land that could be growing trees. Like I have said before, an acre of forest sequesters more carbon annually than what can be saved through the growth of ethanol in 50 years. As usual, people (particularly democrat people) tend to try to do for nature what nature will do for itself. It is hard to do better than God!

With the price of oil at all time highs, as a democrat senator, would you fight for carbon taxes when the science continues to show that many of the schemes to cut carbon dioxide are proving to be inefficient boondoggles? Would you push for tax increases in the middle of a housing recession and credit crunch?

The tide is turning. Senator Obama just proposed a tax cut for the middle class. No doubt, he would pay for it by eliminating slapping shackles on the rest of the economy but at least it is a mention by a democrat that taxes need to be kept low. One of the economic things least understood by the democrats is corporate taxation. The bulk of the taxes paid by corporations are passed directly through to consumers. The big company is easy for democrats to attack but the attacks hurt the "little people" the most. Today, corporate taxes in the USA are high relative to the rest of the world. The same politicians who complain about jobs being lost to competitors overseas are willing to make the situation worse. Countries in Western Europe, Eastern Europe, Asia, Africa and South America have lowered corporate taxes. The manufacturing boom in Eastern Europe, for example, is not an accident. Tax policies do matter and the general principal holds that individuals make better decisions than the government in regard to how to spend the peoples money. There is waste all around; waste committed by individuals, governments and businesses. Schumpter won the "battle" with Galbraith long ago. Even totalitarian regimes do well when they allow the people economic freedom; the Chinese do not have a bill of rights but they are buying homes and buying and selling goods.

WHERE DO WE GO FROM HERE?

Ben Bernanke has demonstrated his understanding that the price of oil will ultimately take care of itself. The economic train does not need to be slowed to a crawl in order to halt inflation. Inflation is always a problem in the balance of goods and money, but given the opportunity the market will find substitution goods if the money is available. The big oil energy projects are still under construction but price does cure price. Much of the current run up is a continuation of speculation. It has always been true that market tops are much harder to see than market bottoms. The topping process is one where momentum is lost and where relative declines occur long before there are actual nominal declines. From 2005 to 2006, the price of oil clearly went up. From the peak in 2006 to the peak in 2007 there has been no real increase. The momentum is gone even though the dollar has fallen to record lows. The dollar is about to turn and go up for the next 5 years or so. All the while, new energy supplies will come on line. Let me put it this way, who would have ever guessed that Russia would sign contracts to supply China and Korea with electricity?

The invisible hand of Adam Smith has been at work and it will continue to work its magic. Is it not just wonderful how the slack in the housing market comes just as construction of refineries, power plants and industrial facilities is gathering steam? Is it not neat that the build out of WiMax net works will occur just as Intel and many others are ready to supply the world with incredibly cheap chips that will dramatically change the way we communicate?

Once again, the price of a computer chip, this time made incredibly small by nano-technology, will drop by thousands of percent. Those who focus on oil to say that inflation is terrible have simply not considered the growth in computer chip sales relative to oil sales. Over the past 30 years, the people of the USA have used less and less oil per person. Sure the nominal price has gone up but the total increase in dollars spent on oil lost its momentum long ago. At the same time, the number of silicon chips purchased has gone up many thousands if not millions of times. The price of these chips has fallen and fallen and fallen some more and are ready to fall once again.

Huge quantities of chips will be sold in coming years. All the ways these chips will be used to boost productivity are not known and not knowable. One known and easy example is the huge savings from avoiding the wrong turn. When GPS is everywhere, a few trillion wrong turns will be avoided each year. Yes, GPS will serve as a substitute for trillions of gallons of fuel.

BUY CONSUMER CYCLICALS, BUY TECHNOLOGY, BUY TRADITIONAL BANKS, BUY INDUSTRIALS, BUY TRANSPORTATION!

MAKE MONEY ALONG WITH THE REST OF THE WORLD!

SELL LONG BONDS, AVOID GOLD, SELL COMMODITIES, AVOID OIL STOCKS, AVOID MATERIALS, AVOID UTILITIES.